Production-Linked Incentives: A Well-Designed Scheme

Context: The Central government’s Production-Linked Incentive scheme (PLI) offers benefits, which are easy to avail of, and it boosts output and exports without flouting WTO rules.

The PLI scheme is designed with four objectives: 

• Target specific product areas;
• Introduce non-tariff measures in order to compete more effectively with cheap imports;
• Blend domestic and export sales to make manufacturing competitive and sustainable;
• Promote manufacturing at home while encouraging investment from within and outside India. 

Various Incentivization Models:

• Special Economic Zones: Creating special jurisdictions, tailored logistics, and specific incentives. E.g.: China in its Pearl River Delta;
• Tax-based and credit-based approaches: to attract investment and employment.
• Productivity and research and development-based approaches: incentivizing technology clusters (advanced batteries in China, for instance, and nano-technology in the US) and research in specific areas like plant biology or the human genome.

Production Linked Incentive (PLI) Scheme:

• Boosts domestic manufacturing and attracts large investments: in the electronics value chain, including electronic components and semiconductor packaging.
• Unique incentives mechanism: Under the scheme, manufacturing companies will get an incentive of 4 to 6% on incremental sales (over the base year) of goods manufactured in India for a period of the next five years.
  • While there are different incentivization methods followed worldwide, India’s PLI scheme resembles the ‘piece rate’ method, which has been declining in use worldwide.
  • While in this method, the incentives are initially given for quantity, they are ultimately designed to increase the quality.
  • Think of it as a ‘subsidy’ for sales, i.e., a straight boost to the top-line. Thus, it avoids credit incentives to turn into non-performing assets.
• Multiplier impact: If the companies invest, then employment and development in that region follow, and with incentive payments, a virtuous cycle sets in.
• Adheres to World Trade Organization (WTO) rules: By its very construct, the PLI scheme does not link the eligibility or quantum of its subsidy to exports and local value addition, thus making it WTO-compliant.

Way forward: “Nature is pleased with simplicity, and nature is no dummy,” said Isaac Newton.

• Government should ease the system: by further improving logistics, ensuring water and electricity, and generally enabling companies to produce and get their products to market.
  • This will not only work in favour of employment and production but also kick-starts private investments.